Interesting Videoclips of the Week (October 31 – November 4, 2011)

Jeff Kilburg, Senior Development Director of TreasuryCurve.com, has been correct in most of his calls on Treasurys. On Monday, October 31, he predicted that the 10-Year Treasury yield will go below 2%. He proved to be right the very next day.  In this clip, he offers his medium term as well as very short term recommendations. Scott, the “Judge” Wapner interviews him in this clip.

• Judge – I give you credit. You said it was going below 2% but don’t even look into the camera and tell me you thought it was going below 2% today.
• Kilburg – … I try to not approach it in a pessimistic way, in an optimistic way. I try to be a realist.  You knew I had skepticism on the rally last week and as we pull the layers over this onion back, what we realize is that Italy is in some trouble., with the debt they have outstanding. There are some grave concerns. MF Global was the one catalyst that kicked everything off this week.
• Wapner – What was the low that we hit on the 10-Year? Was it 1.67% or something around there on an interim basis?
• Kilburg – Yeah, Judge. You are right. In 1945, 1.67% was the low. I called for it being test and we did test it on September 23rd. I think right now, if we do fall short of the details of the G-20 summit, 1.67% is going to be tested again.
• Kilburg – If the G-20 does produce some monumental bazooka out there, I think they really need to come up with a Euro bonds to quell all fears. I know we are a quarter away from Merkel actually getting a Eurobond. But we need something of that size. We are going to see a substantial rally (in interest rates) but we are going to fall short and therefore the test of 1.67% is coming here before the year is over.
• Wapner – The only thing that blows up your trade is a positive headline that could come any moment that causes a rotation again out of Treasuries.
• Kilburg – That’s why you got to be nimble. You could get protection … you could put on some options, this is a good position. It went under 2% today, it hit 1.96%, may be you take some of this trade off…

This was another terrific call that worked the very next morning. If you had sold or shorted long maturity Treasuries or TLT on Tuesday afternoon, you would have made a couple of percent by  Wednesday morning.

At this point. in the clip, Jon Najarian of Trade Monster made a key point:

• Najarian – How do you protect for that? You take a look at some low risk options strategies, in other words, owning options, not selling them naked. The people who have sold them naked, they are a lot like Jon Corzine here, taking on unlimited risk without knowing how they could possibly quantify it, especially if things indeed do decouple. So what you want to do is own option premium, not sell it.

This sounds simple and frankly, it is simple. But trading egos are such, the temptation of being smarter than the market is such, that even pros succumb to their egos and get killed. As the old saying goes, Pride Cometh before a Fall.

George Goncalves is the Head of Interest Rate Strategist at Nomura. He is interviewed by CNBC’s Melissa Lee. His comments begin at minute 1:54 of the clip

• Lee –  what stood out to me in terms of the notes I got, you see the ten-year yield rising to as high as 2.75%. what sort of time frame are we looking at?
• Goncalves – let’s take a step back and assess what happened today with the Fed. I think people are not placing enough emphasis on the fact that the Fed — yes, they downgraded their growth expectations but it’s still positive. In that kind of environment rates should not be under 2%, other than the fear trade we’re getting out of Europe. I think, there’s a disconnect going on where bonds potentially could be wrong. And  the equity market and TIPS as well are telling you that inflation is coming and you need to allocate out of bonds.
• Goncales – I think they’re pretty much done with buying Treasuries. If they come back, we know there’s a lot of talk about them buying mortgages. I think that will be the venue they choose. In that type of situation, spread products, mortgages and credits,  will do better than Treasuries. And Treasury rates can rise. They’re not trying to necessarily floor rates. I think the twist has been infective in that sense.…overnight we’ve seen a lot of selling out of Asia and i think the Central Banks outside of the Fed do not want to buy Treasuries under 2%.
• Lee – in terms of potential mortgage securities purchases, when can we expect that?
• Goncalves – well, I guess if you really listen to the Chairman in the press conference and how he was being very careful in how he worded the MBS part of all the questions he was getting, It’s still on. I think the Bernanke put is still there. I think the MBS QE3 program is still a high probability, it’s just got pushed back. But it is still there.

4. Downgrade of Jefferies – Sean Egan on CNBC Squawk on the Street – Thursday, November 3

Sean Egan, the President of Sean Egan Ratings Company is no stranger to readers of this Blog o
r to CNBC.  His company is the primary independent ratings agency in the country, independent in the sense that it does not take payment from the Issuers of Debt that the company rates

In this clip, he is interviewed by CNBC’s tag team of Carl Quintannia, Melissa Lee, David Faber and Simon Hobbs.

• Lee – I want to cut to the quick. in your note, you write that according to the August 2011 10-Q, Jefferies has sovereign obligations equal to 77% of shareholder equity. Today, Jefferies is putting out a statement saying its exposure is 1% of shareholder equity. Will you revise your credit rating?
• Egan – Probably not. We spoke with Jefferies. We suggested they put out a release. Their contention is they have off setting shorts to balance that and hopefully they will. The issue, the message that has come out is that these things move very quickly and hopefully, they’ll raise equity capital.
• Lee – So, you’re saying at this point they would need to raise capital and that effectively would be dilutive.
• Egan – They have a 13-1 leverage which is a lot less than MF Global’s 40:1. None the less, the environment has changed post Lehman Brothes post MF Global, where by the people who do business with Broker Dealers get stuck and therefore, risk managers are less tolerant than they were a couple of years ago.
• Quintannia – Obviously, the fact the net exposure is thin, Sean, is not enough. Is there something about the off sets that you find unsatisfactory? Is it a matter of buying your protection from a bank in Europe that might be in trouble?
• Egan – Absolutely. You have to make sure that there is a balance. There is no perfect hedge in the market (you will hear someone, we guess Faber, mumbling in the background unbelievable) and you worry about whether or not this structure is set up for the hedges and in the case of the company, Jefferies, we would like them to raise more capital. 13-1 is just too high in this environment. It’s riskier–  banks are supposed to have 9-1 leverage and the company is higher than that.
• Faber – Sean, this is David Faber. I‘d like to understand what happened here. I spoke to the CFO & the CEO, you took a shot at a very vulnerable company here, Stock down as much 20% at one point today. They say they explained to you they had off setting short positions in these securities, cash positions, CDS,  and that you said ultimately if you become public with that, I might revise my rating. I heard you say you are not going to. Why (almost in a shouting tone)  would you come with this report specifically citing the sovereign exposure when they (listen to Faber’s emphasis) told you they had (again emphasis) all the shorts in place that offset it?
• Egan – Let’s put things in perspective, David. We cut our rating from BBB to BBB minus and we put it on negative watch. It’s in recognition of the change in operating environment. Hopefully, the shorts do completely off set the longs.You never have complete comfort on that. In fact, if you look at the tapes
  from Lehman Brother, Bear Stearns, they said they’re completely hedged and not to worry about it. They have very sophisticated internal risk assessment systems and they acted too quickly. … I‘m going to have to speak to my other partners, but we want to see what they come out with. They’ve sent us additional information this morning. It’s unlikely we’ll take a change. I think that the bottom line here is that 13-1 leverage (Faber saying yeah) is too high when you’re unlike a bank – You don’t have the deposits backstopped that are backstopped by the U.S. government effectively and therefore, more vulnerable. Hopefully, they’ll raise capital to reflect the change in the working environment. granted,
• Faber – granted obviously we’re all cynical not because we were born that way, but because of experience, but that being said, when it comes to the leverage ratio, the CFO would point out to me that 13:1, nonetheless, 90% of their assets are more or less are Level One or Level Two. That they have some very long dated long average maturity debt that in a sense almost should be considered capital. They’ve got $3.6 billion in capital and they don’t have these legacy ’08 assets that a lot of these banks have on their sheets that make the quality not quite as good as some of their competitors.
• Egan – David,  you bring up very good points. That is why we did not more of a negative action. But it would be foolish not to realize that the the operating environment has changed. They don’t have the backstop of the FDIC Insurance. We tend to think that 13-1 is too high leverage, that the fundamental business is riskier than the typical bank especially with the right hand side being funded the way it is. Yes, they have some long-term debt. you  take it all in balance and we have to protect our clients. They are investors, they are not the issuers. And our clients should be forewarned to take a closer look at that and hopefully, they are.
• Faber – But you did make the central point of your argument to a certain extent that the sovereign exposure was 77% of their equity. And that doesn’t really appear to be the case.
• Egan – David, I think if we get full disclosure on what those positions are, that would be terrific. We don’t have the full disclosure, nor does the rest of the market. Until we get that comfort, then we might give them a slightly higher rating. It’s unlikely. We still have them at investment grade. Again, it’s a reflection of their operating experience.
• Lee – What would be full disclosure Sean out side of the press release they issued which outlined the specific exposure to each individual country? You want to see all the hedges they have in place?
• Egan – It goes beyond the country. Quite frankly, we worry more about those countries, the issuers that are in the weaker countries than the the countries themselves. For example, in the case of Italy, you probably — we should worry more about corporations that have seen their funding costs rise about 250 basis points over the past year and by the way, that ties back in, there’s another concern of us on Jefferies that their funding costs have increased. This is not a a huge move. We want to see how the company responds to it.
• Faber – in this environment as you point out, it was a modest mo
  ve Sean. None the less, it has significant impact. These are financial companies we’re talking about. it doesn’t take much more from someone like you to set off a potential panic which we saw today.
• Egan – David, I think cutting our rating one notch is a reasonable response to the fact that the company’s funding costs have increased and they still have fairly high leverage and you have some concerns about their sovereign and related exposure. Hopefully, we will get more transparency especially on the derivatives. We would like more information.
• Faber – This is the only downgrade you did today, correct? In other words, is this a unique animal after MF,  there’s no others similar to Jefferies that you also worry about?
• Egan – (a bit exasperated) We’ve put out a number of reports today. I don’t have a listing of all of them. this is a only broker dealer in the last 48 hours, except an update on recovery rates.
• Hobbs – if guys like you are now going look at banks or dealer’s exposure to Europe on the bigger economies and at the corporate level, that is opening a can of maybe the legitimate place to now be, but that opens a can of worms does it not on ratings and exposure on wall street?
• Egan – It has to. For goodness’ sake, if you look at the funding costs of Italy, rising over 200 basis points over the past 12 months, 250 basis points. It has a huge effect. All the banks are scrambling to raise capital. It’s a major event.
• Hobbs interrupts – at the corporate level, importantly now you’re talking about the corporations.
• Egan – yes, you look at the funding costs of the sovereigns and the corporations are below that. because if the sovereign’s funding cost increased, all the corporation’s funding costs have increased, Simon.
• Hobbs – I understand. the exposure typically is much greater. can you repeat that, please. I said I understood what you’re saying, but the exposure typically to the corporations in a nation is far greater for an average bank is far greater than its exposure to sovereign debt which was the point I was simply trying to make.
• Quintannia – So, if you had to put an end period on it, is this call more about what you know or more about the opacity of disclosure, things you do not know?
• Egan – it’s more a warning that the company has to respond. The lessons learned from Lehman Brothers, Bear Stearns, MF Global is
  that there have been massive hubris whereby the companies have assumed that everything is fine, they haven’t taken the investors into account, they haven’t adjusted their business and  as a result, they’ve been caught up in it and there’s been massive loss to the country. Hopefully, there will be some response. Jefferies is an incredible franchise and we hope they live for another 150 years as is Lehman Brothers and hopefully, they’ll make adjustments and realize the operating environment has changed and they have to respond to it. It would be foolish not to.

5. Defending Jefferies: Fears Overblown? – Anton Schutz on CNBC Street Signs – Thursday, November 3

Anton Schutz, President & CIO of Mendon Capital Advisors appeared on CNBC to defend Jefferies and seemingly to rebuke Sean Egan for yelling fire in a crowded theater. His ire at Sean Egan was ably and enthusiastically joined by CNBC Anchors Brian Sullivan and Amanda Drury. Only CNBC’s Herb Greenberg had the courage to defend Sean Egan against attacks by Anton Schutz and CNBC Anchors.

• Sullivan – Anton, were you able to hear the comments I got from Meredith Whitney?
• Anton Schutz – I did. and I agree wholeheartedly.
• Sullivan – Everybody is piling on Jefferies today. We’re not trying to say everything’s fine, but there’s a lot of negative commentary out there. Give us the real story of Jefferies right now.
• Anton Schutz – The real story is someone on a research report and had one side of the equation. your research report isn’t correct. I know that firm came out and tried to defend its research report even further after Jefferies released all of the facts and made it clear that they actually are net short Europe, not to a large amount. but they have a fully balanced portfolio. They’re not taking a big bet anywhere. That’s exactly the culture of this firm. I do business with Jefferies. So most importantly I’m going to continue doing business with Jefferies. That’s the strongest statement I can make. I think it’s irresponsible to shout fire in a crowd. punishing the stock right now
• Drury — you think it’s being unfairly punished?
• Schutz – Sure. it’s about a report that stated half half the truth.
• Greenberg – This is herb. Sean said downgraded mildly at a point. He pointed out the issues. You’re going to fault a guy who’s an independence research guy just for doing that? look. people overreacted or you could argue they overreacted. yeah. i am going to fault him. but you’re saying he yelled fire in the theater. i think he did what he typically does for a living in which he basically — I’m not defending Sean here but you have to say he basically has a good reputation, so you have to take what he says genuinely — fairly seriously.
• Schutz – right. which is yelling fire. I‘m not talking about his reputation. I’m talking about half the facts were stated. Half the facts were they got this big European position. If you don’t have the other half of the story, which is the short European position, then you have a misstatement and it’s material and of course the stock is going to take that kind of hit given what just happened to MF Global, which obviously is scary. You have a theater of people running for the exit. He has a good reputation which is why the stock reacted, but he had only had half the story.
• Sullivan – I‘ve been on the phone with Jefferies multiple times today. Here’s what they said and maybe I misunderstood it as well earlier. There was a feeling that the hedges were maybe credit default swaps and without getting into the weeds that’s a market that’s now being perceived as broken. There’s a feeling maybe the hedges were not appropriate or would not actually work. Jefferies told me moments ago when they put out a second release there are no credit default swaps. Our hedges are pure hedges meaning they have long debt, short debt which actually results in a net short of $38 million. there’s no funky CDS stuff going on here. do you agree with that?
• Schutz – I do agree with it and the first release actually stated it. Didn’t say no credit default swaps but literally said we are short bonds and listed the exact dollar amount by country. you know, I know it clarifies it — they reference these futures. they said through the futures market which I think had a lot of people thinking this was a funky CDS. yep.
• Drury – (minute 03:26) silence —– okay.  i want to get to the SEC. angle with you, Herb. what’s going on? there’s a probe by the SEC. —
• Greenberg – well, what I want to say. We have to be careful how we say this. Earlier I reported John Gavin of Disclosure Insight  mentioned there’s an undisclosed SEC investigation. The company came out effectively and said that it has a limited number of routine regulatory reviews in process all of which are insignificant in scope and absolutely immaterial to Jefferies. I do want to point materiality is a subjective issue. We’ve seen companies say all sorts of things, but given the day of today we’ll say this is their statement and it’s just interesting to note that there are regulatory investigations all the time. yeah. indeed have theirs.
• Sullivan – Anton, you’re not worried about that?
• Schutz – You can’t be. When you’re in the business of having that many securities businesses, you’re always talking to the SEC and you have a lot of employees. You’re always going to have some factors.
• Greenberg – this was the enforcement division according to disclosure insight. But you’re right. and a lot — the thing here was a lot of organizations have disclosed their investigations. this was just undisclosed. just interesting to note.
• Schutz – materiality is always the point where you have to disclose. and if they’re saying it’s not material, then they don’t have disclose. that’s the question.
• Drury –  just real quick Anton, I want to ask you to what extent do you have we feel a bit of a witch hunt going on here? There are a number of companies that will have significant exposure to Europe and the problems over there. You see it blowing up at MF Global. You see obviously the witch hunt going on with Jefferies, et cetera, how many other companies do you think are out there that people will start speculating on as to what their exposure is and attacking the stock?
• Schutz – well certainly, that’s a problem out there when you do have a witch hunt. You have one company which made a wildly crazy bet relative to its capital position. You have to assume people are cowboys and lunatics to take that kind of a bet. It was a crazy bet to make that bet knowing all the things we know. what caused the downfall of Lehman was they felt they were too big to fail and leverage their book with more tough securities. again, that kind of environment was out there throwing a lot of lessons learned here there shouldn’t be a whole lot of MF Globals out here that have made these kind of bets. i know there’s a fear of it.
• Greenberg – Well, I also think trust is a big issue right now with anything financial services related.
• Drury – there’s a lack of confidence. absolutely.
• Schutz – Yeah. I mean, I can tell you at the big banks, you know, the capital that these big banks have is tremendous. they’ve raised so much capital. they’ve got so much in reserves. So heavily regulated and examines all over them all the time.